Commercial Bills/Bills of Exchange

Commercial Bill/Bill of Exchange :

A commercial bill—also called a bank bill or bill of exchange—is a payment order directing your bank to pay a sum of money to the holder of the bill at a future time.

A commercial bill facility is a flexible credit facility which can give your business a short- or long-term injection of cash to finance an individual export contract or general export growth.

How does it work :

You enter into a commercial bill facility with your bank which allows you to draw one or more bills of exchange for acceptance and discounting by your bank. When establishing a commercial bill facility, you agree with your bank:

• the maximum and minimum amounts for the facility
• the term of the entire facility based on the anticipated funding needs of your business (for example, two years)
• the term (or tenor) of each bill within the facility. Typically, the term of each bill is between seven and 180 days. The term you select determines the intervals at which you’ll pay interest under the facility. This gives you flexibility to match your interest payments to your business cash flows.

At the start of a commercial bill facility, you draw a bill of exchange which your bank accepts and sells for you at a discount—an amount less than the face value of the bill. The discounted amount is the amount you receive from your bank. The difference between the face value of the bill and the discounted amount represents the interest payable by you to the bank at the end of the bill term.

At the end of the bill term, you pay your bank the face value of the bill or, if the facility allows you to do so, roll over your debt by drawing a replacement bill for your bank to accept and discount.

A commercial bill facility may include several rollovers and at each rollover you can choose a different principal amount for the next bill you draw (within the limits set by your bank). This allows you to adjust the amount you borrow to match your business cash flow needs and pay interest only on that amount.

Interest Rate :

The interest rate for bills issued under a commercial bill facility can be fixed or variable. If the interest is fixed, your bank will include a risk premium to cover its exposure to market rate movements.

While you make regular interest payments in a commercial bill facility, you don’t usually have to make regular repayments of principal. At the end of the facility term, you repay the face value of the outstanding bill.

Before accepting your bills, many banks or financial institutions will require that you provide security, such as a mortgage or charge over your property and business assets.

Source :www.exportfinance.gov.au

Types of Debentures

Debenture Definition :

Debenture (Greek word) means you owe something and is derived from Latin word “debere” meaning “to borrow”. It is a written certificate/instrument signed by the company under its common seal acknowledging debt due by it to its holders. In simple words, through this document:

• Company promises to pay a specific amount of money as stated
• At a fixed date in future
• Along with periodic interest payment
• To compensate holders for using their funds.

A debenture is a debt instrument similar to a bond. But bonds are secured while debentures are not. However, many people use both the terms interchangeably.

Advantages/Merits of Debenture Issue:

• It enables a company to raise funds for a specific period.
• No dilution of control as debenture holders don’t possess voting rights
• Debenture (debt) enables the company to Trade on equity. It can pay dividend to equity shareholders at a rate higher than overall ROI.
• Debenture holders entitled to a fixed rate of interest. Eg: 10% debenture
• They enjoy priority over other unsecured creditors with respect to debt repayment.
• Suitable for conservative investors who seek steady ROI with little or no risk.
• Interest on debentures is treated as expense and is tax deductible.
• Company can adjust its gearing in accordance to its financial plan.
• Debenture holders are regarded as creditors of the company and they receive preference over equity shareholders and preference share holders.

Disadvantages/Demerits of Debenture issue:

• They have a fixed maturity; hence provision has to be made for repayment.
• There is a limit to which funds can be raised through debentures.
• It is risky if the company fails to pay interest or principal installment on time, as debenture holders can file petition for winding up the company.
• It is not suitable for a company with fluctuating earnings as it may also lead to fluctuations in payment of dividend payable to equity shareholders.
• With more risk, you get more return. Debentures being secure investments, returns are less.
• Like ordinary shares, debenture holders will not be regarded as owners of the company and have no voting rights.

Debentures differ on the basis on terms and conditions on which they are issued.

From the point of view of Security:

Secured/Mortgage Debentures:

Debentures secured against assets of the company .i.e. if the company is winding up, assets will be sold and debenture holders will be paid back. The charge/mortgage may be fixed or a floating charge. If it is fixed, charge is on a specific asset say plant, machinery etc. If it is floating charge, it means it is on general assets of the company. 

Which assets are charged: The ones available with the company presently and also assets in future.

Mortgage deed: Includes nature/value of the security, date of interest payment, and rate of interest, repayment terms, and rights of the debenture holders if the company defaults. In the event of default of company to pay interest or principal installment, they can recover their money via the assets mortgaged. 

Unsecured/Naked Debentures:

Debentures not secured against assets of the company .i.e. if the company is winding up, assets will be not be sold in order to pay the debenture holders. In other words, no charge is created on the assets of the company which means that there is no security of interest and principal payment. The creditworthiness and soundness of the company serves as a security.

From the point of view of Tenure:

Redeemable Debentures:

Debentures which have to be repaid within a certain specified period. Eg: 5% 2 years Rs. 1000 debenture means redeemable period is 2 years(5%:interest/coupon payment). After redemption, they can be reissued.

Irredeemable/Perpetual Debentures:

These can be paid back at any time during the life of the company .i.e. there is no specified period for redemption. Hence they are also called Perpetual Debentures. Nonetheless if the company has to wind up, then they have to repay the debenture holders.

From the point of view of Registration:

Registered Debentures:

As the name suggested, these are debentures that are registered with the company. It records all details of debenture holdings such as name, address, particulars of holding etc. Interest shall be paid only to the registered holder (treated as a non-negotiable instrument). They can be transferred by a transfer deed.

Bearer Debentures:

These can be transferred by mere delivery. Company does not hold records for the debenture holder. Interest will be paid to the one who displays the interest coupon attached to the debenture.

From the point of view of Coupon:

Zero Coupon Debentures:

Does not have a specified interest rate, thereby to compensate, they are issued at a substantial discount. Interest: Difference in face value and issue price.

Specific Coupon rate Debentures:

Debentures are normally issued with an interest rate which is nothing but the coupon rate. It can be fixed or floating. Floating is associated with the bank rates.

From the point of view of Convertibility:

Convertible Debentures (Fully/ Partly convertible):

Debentures which can be converted to either equity shares or preference shares by the company or debenture holders at a specified rate after a certain period. A company can also issue Partly Convertible Debentures whereby only a part of the amount can be converted to equity/preference shares.

Non Convertible Debentures (NCDs):

These can’t be converted into equity/preference shares.

Source : www.Financenmoney.in

Types of Mortgages

DEFINITION AND NATURE OF MORTGAGE:

According to Section 58 of the Transfer of Property Act, 1882, a mortgage is the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an agreement which may give rise to pecuniary liability.

The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest the payment of which is secured for the time being are called the mortgage money and the instrument by which the transfer is effected is called the mortgage deed.

Essentials of a Mortgage:

1. Transfer of Interest: The first thing to note is that a mortgage is a transfer of interest in the specific immovable property. The mortgagor as an owner of the property possesses all the interests in it, and when he mortgages the property to secure a loan, he only parts with a part of the interest in that property in favour of the mortgagee. After mortgage, the interest of the mortgagor is reduced by the interest which has been transferred to the mortgagee. His ownership has become less for the time being by the interest which he has parted with in favour of the mortgagee. If the mortgagor transfers this property, the transferee gets it subject to the right of the mortgagee to recover from it what is due to him i.e., the principal plus interest.
2. Specific Immovable Property: The second point is that the property must be specifically mentioned in the mortgage deed. Where, for instance, the mortgagor stated “all of my property” in the mortgage deed, it was held by the Court that this was not a mortgage. The reason why the immovable property must be distinctly and specifically mentioned in the mortgage deed is that, in case the mortgagor fails to repay the loan the Court is in a position to grant a decree for the sale of any particular property on a suit by the mortgagee.
3. To Secure the Payment of a Loan: Another characteristic of a mortgage is that the transaction is for the purpose of securing the payment of a loan or the performance of an obligation which may give rise to pecuniary liability. It may be for the purpose of obtaining a loan, or if a loan has already been granted to secure the repayment of such loan. There is thus a debt and the relationship between the mortgagor and the mortgagee is that of debtor and creditor. When A borrows 100 bags of paddy from B on a mortgage and agrees to return an equal quantity of paddy and a further quantity by way of interest, it is a mortgage transaction for the performance of an obligation.

Where, however, a person borrows money and agrees with the creditor that till the debt is repaid he will not alienate his property, the transaction does not amount to a mortgage. Here the person merely says that he will not transfer his property till he has repaid the debt; he does not transfer any interest in the property to the creditor. In a sale, as distinguished from a mortgage, all the interests or rights or ownership are transferred to the purchaser. In a mortgage, as stated earlier, only part of the interest is transferred to the mortgagee, some of them remains vested in the mortgagor.

To sum up, it may be stated that there are three outstanding characteristics of a mortgage:

1. The mortgagee’s interest in the property mortgaged terminates upon the performance of the obligation secured by the mortgage.
2. The mortgagee has a right of foreclosure upon the mortgagor’s failure to perform.
3. The mortgagor has a right to redeem or regain the property on repayment of the debt or performance of the obligation.

Difference between Mortgage and Charge:

• A mortgage is created by the act of the parties whereas a charge may be created either through the act of parties or by operation of law.
• A charge created by operation of law does not require the registration as prescribed for mortgage under the Transfer of Property Act. But a charge created by act of parties requires registration.
• A mortgage is for a fixed term whereas the charge may be in perpetuity.
• A simple mortgage carries personal liability unless excluded by express contract. But in case of charge, no personal liability is created. But where a charge is the result of a contract, there may be a personal remedy.
• A charge only gives a right to receive payment out of a particular property, a mortgage is a transfer of an interest in specific immovable property.
• A mortgage is a transfer of an interest in a specific immovable property, but there is no such transfer of interest in the case of a charge. Charge does not operate as transfer of an interest in the property and a transferee of the property gets the property free from the charge provided he purchases it for value without notice of the charge.
• A mortgage is good against subsequent transferees, but a charge is good against subsequent transferees with notice.

Source:www.lawyersclubindia.com

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Types of Mortgage:

1. Simple Mortgage
2. Mortgage by Conditional Sale
3. Usufructuary Mortgage
4. English Mortgage
5. Mortgage by deposit of title Deed
6. Anomalous mortgage

1. Simple Mortgage

A simple mortgage does not involve giving the possession of the mortgagor's property to the mortgagee. It is under mutual agreement that in case of non-payment by the mortgagee to the mortgagor within the specified time, the mortgagee can cause the mortgaged property to be sold in accordance with law and have the sale proceeds adjusted towards the payment of the mortgage money.

2. Mortgage by Conditional Sale

This type of mortgage entails the apparent sale of property by the mortgagor to the mortgagee on a conditional basis, that on default by mortgagor, the sale shall become absolute and complete. If the mortgagor repays his loan, the sale shall become null and void.

3. Usufructuary Mortgage

This type of mortgage, by an express or implied term gives possession to the lender and gives him rights to accrue the rents or income coming from that property as repayment for interest and mortgage money till the time repayment is complete. There is no time limit for payment of the mortgage money.

4. English Mortgage

The mortgagor transfers the mortgaged property to the mortgagee in entirety. However there is a condition that on complete repayment of the repayment money, he will re-transfer the property back to himself.

5. Reverse Mortgage

Reverse mortgage involves lending money to senior citizens against mortgage of their property (house) and there is no need of repaying the same. The loan is awarded as a lump sum amount or as monthly installments. In the event of death of the mortgagor, the property goes into the possession of the mortgagee.

6. Anomalous Mortgage

A mortgage that does not fall under the purview of any of the mortgage types is called an anomalous mortgage.

Conditions attached with mortgage

1. While mortgaging property, only legal rights are transferred to the mortgagee but not the possession.
2. An instrument of mortgage deed is mandatory.
3. On sale of a mortgaged property, the mortgage flows along with the property.

Source :www.indianrealtylaw.com

Mutual Funds

Definition :
A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.


Mutual Fund is a fund, managed by an investment company with the financial objective of generating high Rate of Returns. These asset management or investment management companies collects money from the investors and invests those money in different Stocks, Bonds and other financial securities in a diversified manner


Analysis :
A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Also, one doesn't have to figure out which stocks or bonds to buy. But the biggest advantage of mutual funds is diversification.


Diversification means spreading out money across many different types of investments. When one investment is down another might be up. Diversification of investment holdings reduces the risk tremendously.
Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time.


One of the options is to invest the money in stock market. But a common investor is not informed and competent enough to understand the intricacies of stock market. This is where mutual funds come to the rescue.
On the basis of their structure and objective, mutual funds can be classified into following major types:


1. Open End Mutual Fund :

Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets, as per the stated objectives of the fund. Open-end funds raise money by selling shares of the fund to the public, in a manner similar to any other company, which sell its stock to raise the capital. An open-end mutual fund does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value.


Open-end funds are required to calculate their net asset value (NAV) daily. Since the NAV of an open-end fund is calculated daily, it serves as a useful measure of its fair market value on a per-share basis. The NAV of the fund is calculated by dividing the fund's assets minus liabilities by the number of shares outstanding. Open-end funds usually charge an entry or exit load from the investors.


Most of the open-end funds are actively managed and the fund manager picks the stocks as per the objective of the fund. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations.


Some of the benefits of open-end funds include diversification, professional money management, liquidity and convenience. But open-end funds have one negative as compared to closed-end funds. Since open-end funds are constantly under redemption pressure, they always have to keep a certain amount of money in cash, which they otherwise would have invested. This lowers the potential returns.

2. Closed-End Mutual Fund :
A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed.


Once underwritten, closed-end funds trade on stock exchanges like stocks or bonds. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value.


>>Distinct Features of Closed-end Funds

• These funds are closed to new capital after they begin operating
• Closed-end funds trade on stock exchanges rather than being redeemed directly by the fund
• Unlike open-end funds, the closed-end funds can be traded during the market day at any time. Open-end funds are generally traded at the closing price at the end of the market day.
• Closed-end funds are usually traded at a premiuim or discount whereas open-end funds are traded at NAV.

>>Advantages of Closed-end Funds

• Closed-end funds don't have to worry about the redemption of shares, hence they tend to keep less cash in their portfolios and cam invest more capital in the market. Therefore, they have the potential to generate greater returns as compared to open-end funds.
• In case of market panic and mass-selling by investors, open-end funds need to raise money for redemptions. To cope with the liquidity concerns, the manager of an open-ended fund may be forced to sell stocks he would rather keep, and keep stocks he would rather sell. In such as scenario the quality of the portfolio may be affected.

Certificate of Deposit (CD)

Certificate of Deposit (CD) Definition:
A Certificate of Deposit or CD is a special type of time deposit used by many financial institutions, usually a commercial bank. Certificates of deposit generally offer fixed rates of return for periods of 1 month, 3 months, 6 months, 1 year, or more depending on the investor's preference.

Certificate of Deposit (CD) Explained:
A Certificate of Deposit is generally used by investors who need a short term arrangement to earn a fixed return. CD rates are better than a savings account, but are different in that the money can not be withdrawn until the end of the CD term. Certificate of deposit early withdrawal will cost the investor to pay a large penalty. This means that the investor must be absolutely sure the funds can remain untouched until the certificate of deposit maturity. Certificates of deposit risks are generally restricted to the early withdrawal because it is unlikely that any of the financial institutions will default on CDs because of their short term nature. CDs that are denominated in $100,000 and above are referred to as negotiable certificates of deposit. This allows the investor to determine the penalty of early withdrawal as well as the rate of return. Other terms can also be calculated into the negotiable CD.

Certificate of Deposit (CD) Example:
Bob has $1,000 in a savings account, but he would like to earn a greater return than the 0.5%. Bob goes to his bank and decides that he would like to invest his funds into a certificate of deposit so that he might earn a more meaningful return from the bank. The bank offers CD terms of 1.35% for a 3 month period. Bob decides to go forward with the agreement and at the end of the 3 month term he has earned interest of $3.38. This number is opposed to the $1.25 that would have been earned had Bob stayed with the savings account.

Source:--------->wikiCFO

Commercial Paper (CP)

Commercial Paper :

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.

Read the following FAQs on Commercial Paper for More Information:

1. What is Commercial Paper (CP)?

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

2. When it was introduced?

It was introduced in India in 1990.

3. Why it was introduced?

It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.

4. Who can issue CP?

Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP.

5. Whether all the corporates would automatically be eligible to issue CP?

No. A corporate would be eligible to issue CP provided –

a. the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore

b. company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and

c. the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.

6. Is there any rating requirement for issuance of CP? And if so, what is the rating requirement?

Yes. All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified by the Reserve Bank of India from time to time, for the purpose.

The minimum credit rating shall be A-2 [As per rating symbol and definition prescribed by Securities and Exchange Board of India (SEBI)].

The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has not fallen due for review.

7. What is the minimum and maximum period of maturity prescribed for CP?

CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue. However, the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.

8. What is the limit up to which a CP can be issued?

The aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors or the quantum indicated by the Credit Rating Agency for the specified rating, whichever is lower.

As regards FIs, they can issue CP within the overall umbrella limit prescribed in the Master Circular on Resource Raising Norms for FIs, issued by DBOD and updated from time-to-time.

9. In what denominations a CP that can be issued?

CP can be issued in denominations of Rs.5 lakh or multiples thereof.

10. How long can the CP issue remain open?

The total amount of CP proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription.

11. Whether CP can be issued on different dates by the same issuer?

Yes. CP may be issued on a single date or in parts on different dates provided that in the latter case, each CP shall have the same maturity date. Further, every issue of CP, including renewal, shall be treated as a fresh issue.

12. Who can act as Issuing and Paying Agent (IPA)?

Only a scheduled bank can act as an IPA for issuance of CP.

13. Who can invest in CP?

Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time.

14. Whether CP can be held in dematerilaised form?

Yes. CP can be issued either in the form of a promissory note (Schedule I given in the Master Circular-Guidelines for Issue of Commercial Paper dated July 1, 2011 and updated from time –to-time) or in a dematerialised form through any of the depositories approved by and registered with SEBI. Banks, FIs and PDs can hold CP only in dematerialised form.

15. Whether CP is always issued at a discount?

Yes. CP will be issued at a discount to face value as may be determined by the issuer.

16. Whether CP can be underwritten?

No issuer shall have the issue of Commercial Paper underwritten or co-accepted.

17. Whether CPs are traded in the secondary market?

Yes. CPs are actively traded in the OTC market. Such transactions, however, are to be reported on the FIMMDA reporting platform within 15 minutes of the trade for dissemination of trade information to market participation thereby ensuring market transparency.

18. What is the mode of redemption?

Initially the investor in CP is required to pay only the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer through IPA. On maturity of CP,

(a) when the CP is held in physical form, the holder of the CP shall present the instrument for payment to the issuer through the IPA.

(b) when the CP is held in demat form, the holder of the CP will have to get it redeemed through the depository and receive payment from the IPA.

19. Whether Stand by facility is required to be provided by the bankers/FIs for CP issue?

CP being a `stand alone’ product, it would not be obligatory in any manner on the part of banks and FIs to provide stand-by facility to the issuers of CP.

However, Banks and FIs have the flexibility to provide for a CP issue, credit enhancement by way of stand-by assistance/credit backstop facility, etc., based on their commercial judgement and as per terms prescribed by them. This will be subjected to prudential norms as applicable and subject to specific approval of the Board.

20. Whether non-bank entities/corporates can provide guarantee for credit enhancement of the CP issue?

Yes. Non-bank entities including corporates can provide unconditional and irrevocable guarantee for credit enhancement for CP issue provided :

a. the issuer fulfils the eligibility criteria prescribed for issuance of CP;

b. the guarantor has a credit rating at least one notch higher than the issuer by an approved credit rating agency and

c. the offer document for CP properly discloses: the networth of the guarantor company, the names of the companies to which the guarantor has issued similar guarantees, the extent of the guarantees offered by the guarantor company, and the conditions under which the guarantee will be invoked.

21. Role and responsibilities of the Issuer/Issuing and Paying Agent and Credit Rating Agency.

Issuer:

a. Every issuer must appoint an IPA for issuance of CP.

b. The issuer should disclose to the potential investors its financial position as per the standard market practice.

c. After the exchange of deal confirmation between the investor and the issuer, issuing company shall issue physical certificates to the investor or arrange for crediting the CP to the investor's account with a depository.

Investors shall be given a copy of IPA certificate to the effect that the issuer has a valid agreement with the IPA and documents are in order (Schedule II given in the Master Circular-Guidelines for Issue of Commercial Paper dated July 1, 2011 and updated from time –to-time).

Issuing and Paying Agent

a. IPA would ensure that issuer has the minimum credit rating as stipulated by the RBI and amount mobilised through issuance of CP is within the quantum indicated by CRA for the specified rating or as approved by its Board of Directors, whichever is lower.

b. IPA has to verify all the documents submitted by the issuer viz., copy of board resolution, signatures of authorised executants (when CP in physical form) and issue a certificate that documents are in order. It should also certify that it has a valid agreement with the issuer (Schedule II given in the Master Circular-Guidelines for Issue of Commercial Paper dated July 1, 2011 and updated from time –to-time).

c. Certified copies of original documents verified by the IPA should be held in the custody of IPA.

Credit Rating Agency

a. Code of Conduct prescribed by the SEBI for CRAs for undertaking rating of capital market instruments shall be applicable to them (CRAs) for rating CP.

b. Further, the credit rating agencies have the discretion to determine the validity period of the rating depending upon its perception about the strength of the issuer. Accordingly, CRA shall at the time of rating, clearly indicate the date when the rating is due for review.

c. While the CRAs can decide the validity period of credit rating, CRAs would have to closely monitor the rating assigned to issuers vis-a-vis their track record at regular intervals and would be required to make its revision in the ratings public through its publications and website

22. Is there any other formalities and reporting requirement with regard to CP issue?

Fixed Income Money Market and Derivatives Association of India (FIMMDA), may prescribe, in consultation with the RBI, any standardised procedure and documentation for operational flexibility and smooth functioning of CP market. Issuers / IPAs may refer to the detailed guidelines issued by FIMMDA on July 5, 2001 in this regard, and updated from time-to-time.

Every CP issue should be reported to the Chief General Manager, Reserve Bank of India, Financial Markets Department, Central Office, Fort, Mumbai through the Issuing and Paying Agent (IPA) within three days from the date of completion of the issue, incorporating details as per Schedule III given in the Master Circular-Guidelines for Issue of Commercial Paper dated July 1, 2011 and updated from time-to-time.

Source: www.rbi.org.in

Bankers Acceptance

Bankers’ Acceptance:
A bankers’ acceptance (BA) is a short-term debt instrument traded in money markets. The instrument is derived from an underlying commercial transaction and is backed by the credit of the bank that accepted and subsequently sold it. Bankers’ acceptances typically trade at a discount from face value.

Importers and exporters have been using bankers’ acceptances to finance international trade transactions for hundreds of years. Essentially, for a set fee, a bank agrees to finance the purchase of an import order by “accepting” a time draft, or invoice with a set value and specified payment date, from the exporter. By accepting the time draft and creating the bankers’ acceptance, the bank is guaranteeing payment of the invoice amount. The contract created from the transaction is then sold and traded in secondary markets.

Bankers’ Acceptances typically have maturities of 30 days, 90 days, or 180 days. Once the bankers’ acceptance has been accepted by the bank it is backed by the bank’s credit. The tradable instrument is considered separate from the underlying transaction – even if the underlying transaction falls through, the bank is still obligated to pay the face value of the bankers’ acceptance to whomever is holding it at its maturity date. For these two reasons, bankers’ acceptances are considered safe investments and they offer yields comparable to those of certificates of deposit.

Bankers’ Acceptance Illustration:
Let’s say a US importer orders a shipment of fruit from a Panamanian exporter. The importer wants to finance the purchase with a bankers’ acceptance agreement. For a fee, the importer gets the importer’s bank to issue a letter of credit to the exporter’s bank. The exporter’s bank shows the letter of credit to the exporter, and then the exporter ships the fruit.

Once the fruit has been shipped, the exporter sends copies of the shipping documents and the order invoice to the exporter bank. The exporter bank then forwards these documents to the importer bank. Once the importer bank “accepts” the invoice, or agrees to pay the amount due at the specified date, the bankers’ acceptance (BA) has been created. The importer is now allowed to collect the fruit shipment.

The exporter can then choose to discount the BA, or accept early payment at a discount to face value from the importer bank. If so, then the bank pays down the invoice and gets the BA back. The BA now represents the money the importer owes to the importer bank. This money is due at the maturity date of the BA.

The bank can hang on to the BA until it matures, or it can sell the BA in the secondary markets. After selling it in the secondary markets, it trades among investors and whoever possesses the BA at maturity collects payment from the bank (after the bank has collected payment from the importer). The bank profits from the fees it charges for facilitating the transactions and financing the importer’s purchase, and also from selling the BA at a slight premium above what it paid for the invoice.

Source:--------->wikiCFO

Common Stock or Owner's Equity

Common Stock Definition:
Shares of common stock represent ownership of a public or private corporation. Shares of common stock usually give the shareholder voting rights. This means the shareholder can vote on matters of corporate policy and the selection of members of the board of directors. The more shares an investor owns, the more influence that investor has on the company.

Shares of common stock typically trade on financial exchanges and their values fluctuate according to the company’s performance and the market’s perceptions of the company.

If a company goes out of business and liquidates its assets, the common stockholders are the last ones to get their invested capital back. Bondholders and preferred stock holders are reimbursed before common stockholders.

Owner’s Equity Definition:
Owner's Equity defined: it represents the company’s net worth, or its assets minus its liabilities. It is is a section on the balance sheet. It also represents the owners’ interests in the assets of the company. Owners’ equity is also called stockholders’ equity and shareholders’ equity.

Owner's Equity Explanation:
Owners’ equity, explained simply, has two components: capital contributed from owners and shareholders, and profits earned by the company. Contributed capital refers to the funds raised by issuing stock to investors. The money investors paid to purchase shares of stock is contributed capital. The accumulated profits earned by the company are called retained earnings and are also included in owners’ equity.

The owners’ equity section of the balance sheet may include accounts such as common stock, preferred stock, additional paid-in capital, treasury stock (a contra-equity account), retained earnings, and other comprehensive income.

Owner's Equity Formula:
There are two ways to use the owner's equity formula:

Owners’ Equity = Total Assets – Total Liabilities

Owners’ Equity = Contributed Capital + Retained Earnings – Treasury Stock

Owner's Equity Calculation:
Owner's equity calculated:

If:
Total Assets = $100,000
Total Liabilities = $50,000


Owner's Equity = $100,000 - $50,000 = $50,000

or

If:
Contributed Capital = $200,000
Retained Earnings = $50,000
Treasury Stock = $50,000

Owner's Equity = $200,000 + $50,000 - $50,000 = $200,000

Owner's Equity Example:
Cynthia has a company, online, which makes custom t-shirts. Cynthia has worked hard, in both marketing and operations, to create a business which can sustain her lifestyle.

Cynthia initially took on some investment capital to start her business. She now wants to know total owner's equity. Cynthia looks at the owner's equity balance sheet column and performs the equation below.

If:
Contributed Capital = $200,000
Retained Earnings = $50,000
Treasury Stock = $50,000


Owner's Equity = $200,000 + $50,000 - $50,000 = $200,000

Cynthia knows the value of the owner's equity statement in her financials. Her Owner's equity accounts tell her the amount of money shareholders have in her company.

Financial Instruments

Financial Instruments and Securities:
Financial instruments are contracts that represent value. They come in many varieties. In fact, financial managers and bankers have a lot of leeway in creating and issuing financial instruments. The Securities and Exchange Commission (SEC) regulates publicly traded financial instruments, but private placement instruments are less stringently regulated.

Most financial instruments fall into one or more of the following five categories:
>>Money market instruments,
>>Debt securities,
>>Equity securities,
>>Derivative instruments, and
>>Foreign exchange instruments.

Money Market Instruments:
Money market instruments are highly marketable short-term debt securities. Money market instruments are generally low-risk investments. Because of this, they offer yields that are lower than riskier securities and financial instruments.

Money market instruments are often traded in large denominations among institutional investors. However, some money market instruments are available to individual investors via money market funds, or mutual funds that pool money market instruments.

Money market instruments include treasury bills, repurchase agreements, certificates of deposit, commercial paper, bankers’ acceptances, Eurodollars, and federal funds.

Debt Securities:
Debt securities are longer-term debt instruments. With debt instruments, the issuer is essentially borrowing money from the investor. The investor plays the role of a lender lending money to the issuing entity. Longer-term debt securities often yield higher returns than money market instruments. Debt instruments also represent a claim on the assets of the issuing entity.

Debt securities are often called fixed-income securities. This is because the terms of the debt instrument are often predetermined. For example, a debt instrument will be issued with a certain maturity, a certain principal amount, and a set coupon rate. However, while debt securities are often called fixed-income securities, this does not mean they yield a fixed stream of payments – debt securities’ returns can fluctuate and vary.

Examples of debt securities include: treasury notes, treasury bonds, inflation-protected treasury bonds, federal agency debt, international bonds, municipal bonds, corporate bonds, junk bonds, mortgages, mortgage-backed securities, and other types of debt.

Equity Securities:
Equity securities represent shares of ownership in a company. Equity securities often come with voting rights. They represent the shareholders’ interest in the issuing company and a residual claim on the company’s assets. This means if the issuing company goes bankrupt and has its assets liquidated, the equity holders only get their money back after all other relevant claimants have been paid what they are owed.

Equity securities may be traded publicly on stock exchanges, they may be traded in over-the-counter (OTC) transactions, or they may be exchanged and held privately. Types of equity securities include common stock, preferred stock, and American Depository Receipts (ADR).

Financial Derivative Instruments:
A financial derivative instrument is a contract that derives its value from an underlying asset or factor. In short, the value of a derivative depends on the value of something else. When the value of the underlying factor changes, the value of the derivative instrument also changes. Derivatives are often used for speculation, for leveraging a position, or for hedging risk.

Common derivatives include futures, forwards, options, and swaps. Common underlying assets or factors include stocks, bonds, currency exchange rates, commodity prices, market indices, and interest rates. However, derivatives can derive their value from almost anything, including weather data and political election outcomes.

Foreign Exchange Instruments:
nother category of financial instruments is foreign exchange instruments. These are contracts involving different currencies. There are many currencies in the world, and there are several different instruments commonly used to trade in currencies.

The value of one currency relative to another depends on the exchange rate between the two currencies. Exchange rates can be fixed or floating. Types of foreign exchange instruments include spot contracts, forward contracts, options, futures, and swaps.

Foreign currencies are exchanged for investment and speculative purposes and for hedging risk. Foreign currencies are traded all over the world twenty-four hours a day via banks and brokerages. The foreign exchange market is the largest market in the world. Speculating in foreign exchange markets is considered very risky.

Bond Analysis

Bond Definition:

A bond is a corporate or government debt instrument. It represents a loan to the company (in the case of a corporate bond) from the investing public. In this case, the company is the borrower and the investor is the lender. Companies issue bonds to raise money for business investments.

A bond has a par value, a maturity date, and a coupon rate. The maturity date is the date the company must repay the investor an amount equal to the par value. The par value is the amount the lender will receive at the maturity date. The coupon rate is the interest rate on the bond. A coupon is typically semi-annually. So if the bond has a coupon rate of 8%, the investor will receive two payments per year, each equal to 4% of the bond’s par value.

Rating agencies rate the creditworthiness of bonds. High quality bonds are considered investment grade. Low quality bonds are considered noninvestment grade, or junk bonds.

Par Value of Bonds:
The par value of a bond refers to the principal – the amount of money the bondholder receives when the bond matures. Par value is also called face value or nominal value. It is the amount stipulated in the bond contract. Par value does not include interest payments. Bond interest rates are quoted as a percentage of the par value of the bond. While bond prices can fluctuate, the bond always matures at par value. However, if the bond issuer defaults, the bondholder may only receive a portion of the par value or nothing at all.

A bond priced above par value is selling at a premium and a bond priced below par value is selling at a discount.

Par values for corporate bonds, municipal bonds, and federal government bonds are usually $1,000, $5,000, and $10,000, respectively.

Bond Face Value:
The face value of a bond is the same as the par value of a bond. It is the principal amount.

Nominal Value, Bond:
The nominal value of a bond is the same as the par value of a bond. It is the principal amount.
 Bond Coupon:
A bond coupon refers to the interest payments the bond issuer pays to the bondholder periodically until the bond matures. Bond coupon rates are quoted as annual rates, but the coupons are typically paid semi-annually. The term “coupon” stems from the days when bondholders would actually tear detachable coupons from the bond certificate and turn them in to the bond issuer on certain dates to redeem the interest payments.

The coupon rate of a bond is the annual interest rate the issuer pays to the bondholder. The rate is expressed as a percentage of the bond’s face value. Bond coupon rates are quoted as annual rates, but the bond coupons are typically paid semi-annually.

For example, an investor holding a bond with a $1,000 face value and a 10% annual bond coupon will receive $100 in interest yearly until the bond matures. At maturity the investor will receive the principal, also called the face value or the par value, plus the final coupon payment. Similarly, an investor holding a bond with a $1,000 face value and a 10% semi-annual coupon will receive $50 in interest every six months until maturity. 

Maturity Date:

In finance, a maturity date is the date on which a debt instrument is due. For example, when a bond reaches maturity, the issuer must pay the bondholder the principle and the final interest payment. A debt instrument’s maturity is one of the factors that determine the price and yield of the instrument. Because of the time value of money and the increased risk of volatility, debt instruments with longer maturities often have higher yields. 

Covenant Definition (Restrictive Covenant):

A covenant is a restrictive clause in a bond contract. The purpose of the clause is to protect the lender (the party that invests in the bond) by imposing restrictions on the borrower (the party that issues the bond). Essentially, the covenant amounts to the lender agreeing to lend money to the borrower as long as certain financial performance criteria are met and maintained throughout the duration of the loan contract. Covenants may cover criteria such as levels of working capital, debt-equity ratios, dividend payments, and other factors that can affect the borrower’s ability to repay loans. 

Zero-Coupon Bonds:

A zero coupon bond is a debt security that does not have periodic interest payments. The bond is issued at a deep discount from par value, to compensate for the lack of interest payments, and then redeemed at par value at maturity.

Stripped Bond:
Strip bonds are synthetic zero-coupon bonds created by banks or dealers. The principal amount (the corpus) is separated from the interest payments (the coupon payments) and the two parts are sold separately to investors. This creates zero-coupon bonds. The investors then receive a lump sum at the maturity date, equal to the value of corpus or the coupon payments, depending on their contract. The contracts are known as STRIPS (Separate Trading of Registered Interest and Principal of Securities).

Imputed Interest:
According to the IRS, the holder of a zero-coupon bond owes income tax on the bond’s imputed interest. Imputed interest refers to the implied periodic interest payments that the bondholder does not actually receive until maturity. Imputed interest on zero-coupon bonds issued by municipalities is tax exempt.

High Yield Debt (Junk Bonds) :A non-investment grade bond, also called a speculative bond, a high yield bond, an unsecured debenture, or a junk bond, is a bond that is considered a low quality investment because the issuer may default. Rating agencies have systems for rating bonds as investment grade or non-investment grade. Non-investment grade bonds offer higher yields than investment grade bonds to compensate for the greater risk.

High Yield Bond Ratings :

Credit rating agencies rate bonds based on the creditworthiness of the issuer. A bond is given a grade, and the grades are ranked like this: AAA, AA, A, BBB, BB, B, CCC, CC, C, and at the bottom is D.

The highest quality corporate bonds will have a rating of AAA. (US government bonds are considered risk-free and are ranked above AAA.) The lowest quality bonds are rated D, or already in default. Anything rated BBB or above is investment grade. Anything rated BB or below is non-investment grade. Different rating agencies may use different variations of the above rating system. For example, an agency may include plus (AA+) and minus (BBB-) signs to add levels to the rating system.

Junk Bond Yields:
Junk bonds return higher yields than high-quality bonds. The higher yield compensates the investor for the greater risk associated with the lower quality investment.

Junk Bond Index:
A junk bond index tracks the performance of non-investment grade bonds.

Junk Bond Trader:
A junk bond trader is an individual who trades non-investment grade bonds in the marketplace.

Junk Bond Fund:
A junk bond fund is a mutual fund or an exchange-traded-fund (ETF) comprised of non-investment grade bonds. Junk bond funds are convenient financial instruments for investing in high yield bonds.